Impermanent loss is the difference between holding two assets and depositing them into an automated market maker liquidity pool.
Why It Happens
When token prices move, the pool automatically rebalances. Liquidity providers end up holding more of the weaker asset and less of the stronger asset.
Why Fees Matter
Trading fees can offset impermanent loss, but only if volume is real and sustained. A high advertised APR can still lose money if token prices move sharply or rewards are paid in an inflating token.
A Simple Way To Think About It
Liquidity providers sell a little of the asset that rises and buy a little of the asset that falls because the pool must keep its ratio balanced. That automatic rebalancing is useful for traders but can hurt providers when prices diverge.
| Pool type | Typical IL risk |
|---|---|
| Stablecoin pair | Lower, assuming both assets keep their peg. |
| Blue-chip volatile pair | Moderate, depending on volatility and fee income. |
| New token pair | High, especially if one asset trends strongly. |
| Concentrated liquidity position | Can be higher if price leaves the chosen range. |
When Fees Can Help
Fees are the compensation for taking liquidity risk. A pool with high real volume and moderate volatility can outperform holding. A pool with low volume, high volatility, or incentive-token APR can underperform even when the dashboard shows attractive yield.
How TokenRadar Applies This
TokenRadar reads liquidity incentives with market quality. High yield is less attractive if rewards are inflationary, pool depth is thin, or one side of the pair has weak demand. The best liquidity programs usually have transparent fee generation and realistic reward schedules.
Practical Rule
Before depositing, compare the expected fee income with a realistic price-movement scenario. If you would be unhappy owning more of the weaker asset after a drawdown, the pool is probably not a good fit.